Gannett Reports Third Quarter 2019 Results

Gannett Co., Inc. (NYSE:GCI) ("Gannett" or "company" or "we" or "our") today reported third quarter 2019 financial results for the period ended September 30, 2019.

"In the third quarter, we delivered our best same store revenue performance of the year driven by improved print and digital trends across our Marketing Solutions business and stable trends within our Consumer operations," said Paul Bascobert, president and chief executive officer. "We were pleased to see our ReachLocal segment return to same store revenue growth led by strong gains at WordStream and our local markets. We expect continued improvement within our digital advertising and marketing services revenues as we head into the fourth quarter."

"Our same store operating expenses fell 8.4% in the quarter enabling us to deliver flat Adjusted EBITDA margins year-over-year," said Ali Engel, senior vice president and chief financial officer. "We continue to focus on finding efficiencies across our operations, while also investing in strategic areas to drive future growth."

Third Quarter 2019 Consolidated Results

• Operating revenues were $635.6 million, compared to $711.7 million in the third quarter of 2018.
• Unfavorable changes in foreign currency exchange rates negatively impacted revenues by $3.9 million.
• Same store operating revenues declined 7.8% year-over-year, an improvement from the second quarter decline of 9.8%.
• Total digital revenues reached $244.3 million, or approximately 38% of total revenue.
• Total digital advertising and marketing services revenues were $183.6 million, or 53% of total advertising and marketing services revenues.
• GAAP net income was $10.6 million, including $7.8 million of after-tax restructuring, asset impairment charges, and other costs, offset by $5.8 million of after-tax gains on property sales.
• Adjusted EBITDA(1) decreased 11% year-over-year to $62.2 million, representing a margin of 9.8%, consistent with the third quarter of 2018.

Third Quarter 2019 Publishing Segment

• Publishing segment operating revenues were $549.8 million compared to $616.4 million in the third quarter of 2018. On a same store basis, segment revenues declined 9.1%.
• Same store print advertising revenues declined 18.0% year-over-year, an improvement from the second quarter decline of 18.5%.

• Digital advertising and marketing services revenues of $100.3 million declined 3.7% year-over-year, on a same store basis, better than the 4.5% decline in the second quarter.
  • Digital marketing services revenues of $22.2 million increased 11.1%, on a same store basis, driven by strong gains at Newsquest and higher average revenue per client and client growth in our US local markets.
  • Digital media advertising revenues of $64.5 million declined 2.5%, on a same store basis, due to weakness in domestic local display which offset continued growth in domestic national and Newsquest.
  • Digital classified advertising revenues of $13.5 million declined 24.4%, on a same store basis, reflecting expected weakness across all categories, including the negative impact from our early exit from the Cars.com agreement.

• Same store circulation revenues declined 5.8% from the prior year quarter, substantially unchanged from the second quarter trend.
• Digital-only subscriber volumes grew 27% year-over-year and now total approximately 607,000.
• Publishing segment Adjusted EBITDA was $69.0 million compared to $72.7 million in the prior year quarter.

Third Quarter 2019 ReachLocal Segment

• ReachLocal segment revenues were $101.1 million compared to $109.6 million in the third quarter of 2018. On a same store basis, ReachLocal segment revenues increased 2.5%, a substantial improvement from the 6.9% decline in the second quarter, driven by strong growth at WordStream and the Gannett local markets, offset by softness in the remaining North American operations and Australia.
• Adjusted EBITDA was $12.8 million, representing a margin of 12.6% compared to 15.8% in the third quarter of 2018.

Third Quarter 2019 Cash Flow

• Net cash flow provided by operating activities was approximately $64.2 million compared to $60.9 million provided by operating activities in the prior year quarter.
• Capital expenditures were $15.4 million, primarily for product development, technology investments, and maintenance projects.
• The company paid dividends of $18.4 million; there were no share repurchases.
• As of the end of the third quarter, the company had a cash balance of $101.4 million, $120.0 million drawn on its revolver, and $173.1 million in convertible notes(2), or net debt of $191.7 million.

Outlook

For 2019, the company expects the following (assuming the company remains a stand-alone entity though the end of the year)(3):

• Consolidated revenues of $2.61-2.63 billion, as compared to $2.74-2.81 billion previously.
• Consolidated Adjusted EBITDA of $285-295 million.
• Capital expenditures of $45-50 million, excluding real estate projects.
• Depreciation and amortization of $135-145 million, excluding accelerated depreciation related to facility consolidations.
• The non-operating cost associated with our pension plans, recorded in other non-operating items, is currently estimated to be between $20-25 million as compared to a credit of $5 million in 2018.
• A non-GAAP effective tax rate of 28-30%.(1)

Conference Call Information

The company will hold a conference call at 10:00 a.m. ET today to discuss its third quarter results. The call can be accessed via live webcast through the company's investor site, http://investors.gannett.com/ or listen-only conference lines. U.S. callers should dial 855-462-1958 and international callers should dial 503-343-6635 at least 10 minutes prior to the scheduled start of the call. The confirmation code for the conference call is 6391979. A conference call replay will be available through November 18, 2019. U.S. callers should dial 855-859-2056 and international callers should dial 404-537-3406.

Forward Looking Statements

This press release contains certain forward-looking statements regarding business strategies, market potential, future financial performance and other matters. Forward-looking statements include all statements that are not historical facts. The words “believe,” “expect,” “estimate,” “could,” “should,” “intend,” “may,” “plan,” “seek,” “anticipate,” “project” and similar expressions, among others, generally identify forward-looking statements, which speak only as of the date the statements were made and are not guarantees of future performance. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Whether or not any such forward-looking statements are in fact achieved will depend on future events, some of which are beyond our control. The matters discussed in these forward-looking statements are subject to a number of risks, trends, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. These factors include, among other things:

• Risks and uncertainties relating to the proposed transaction between us and New Media Investment Group Inc., including the parties' ability to consummate the proposed transaction in the time period expected or at all, and risks relating to the parties' ability to achieve the anticipated benefits of the proposed transaction;
• Our ability to achieve our strategic transformation;
• Potential disruption due to the reorganization of our sales force;
• An accelerated decline in general print readership and/or advertiser patterns as a result of changing consumer preferences, competitive alternative media, or other factors;
• An inability to adapt to technological changes or grow our digital businesses;
• Risks associated with the operation of an increasingly digital business, such as rapid technological changes, challenges associated with new delivery platforms, declines in web traffic levels, technical failures and proliferation of ad blocking technologies;
• Competitive pressures in the markets in which we operate;
• Macroeconomic trends and conditions;
• Increases in newsprint costs over the levels anticipated or declines in newsprint supply;
• Risks and uncertainties associated with our ReachLocal segment, including its significant reliance on Google for media purchases, its international operations and its ability to develop and gain market acceptance for new products or services;
• Our ability to protect our intellectual property or defend successfully against infringement claims;
• Our ability to attract and retain talent;

• Labor relations, including, but not limited to, labor disputes which may cause business interruptions, revenue declines or increased labor costs;
• Potential disruption or interruption of our IT systems due to accidents, extraordinary weather events, civil unrest, political events, terrorism or cyber security attacks;
• Risks and uncertainties related to strategic acquisitions, investments, or divestitures, including distraction of management attention, incurrence of additional debt, integration challenges, and failure to realize expected benefits or synergies or to operate businesses effectively following acquisitions;
• Risks of financial loss and reputational harm related to reduction or closure of operations in light of ongoing challenges affecting the publishing industry;

• Variability in the exchange rate relative to the U.S. dollar of currencies in foreign jurisdictions in which we operate;

• Risks associated with our underfunded pension plans and the plans of our affiliates and investees;
• Adverse outcomes in litigation or proceedings with governmental authorities or administrative agencies, or changes in the regulatory environment, any of which could encumber or impede our efforts to improve operating results or the value of assets;
• Volatility in financial and credit markets which could affect the value of retirement plan assets and our ability to raise funds through debt or equity issuances and otherwise affect our ability to access the credit and capital markets at the times and in the amounts needed and on acceptable terms;
• Risks to our liquidity related to the redemption, conversion and similar features of our convertible notes;
• Political, economic, and market uncertainty resulting from the pending withdrawal of the U.K. from the European Union; and
• Other uncertainties relating to general economic, political, business, industry, regulatory and market conditions.

A further description of these and other important risks, trends, uncertainties and other factors is provided in the company’s filings with the U.S. Securities and Exchange Commission, including the company’s annual report on Form 10-K for fiscal year 2018. Any forward-looking statements should be evaluated in light of these important risk factors. The company is not responsible for updating or revising any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Non-GAAP Financial Measures

This press release also contains a discussion of certain non-GAAP financial measures that the company presents to allow investors and analysts to measure, analyze and compare its financial condition and results of operations in a meaningful and consistent manner. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables accompanying this press release.

About Gannett

Gannett Co., Inc. (NYSE: GCI) is an innovative, digitally focused media and marketing solutions company committed to strengthening communities across our network. With an unmatched local-to-national reach, Gannett touches the lives of more than 125 million people monthly with our Pulitzer-Prize winning content, consumer experiences and benefits, and advertiser products and services. Gannett brands include USA TODAY NETWORK with the iconic USA TODAY and more than 100 local media brands, digital marketing services companies ReachLocal, WordStream and SweetIQ, and U.K. media company Newsquest. To connect with us, visit www.gannett.com.

USE OF NON-GAAP INFORMATION

The company uses non-GAAP financial performance and liquidity measures to supplement the financial information presented on a GAAP basis. These non-GAAP financial measures, which may not be comparable to similarly titled measures reported by other companies, should not be considered in isolation from or as a substitute for the related GAAP measures and should be read together with financial information presented on a GAAP basis.

The company defines its non-GAAP measures as follows:

• Adjusted EBITDA is a non-GAAP financial performance measure that the company believes offers a useful view of the overall operation of our business. The company defines adjusted EBITDA as net income before (1) income taxes, (2) interest expense, (3) equity income, (4) other non-operating items, (5) restructuring costs, (6) asset impairment charges, (7) certain gains or losses on sales of properties, (8) other items (including acquisition-related expenses, certain business transformation costs, litigation expenses, and gains or losses on certain investments), and (9) depreciation and amortization. The most directly comparable GAAP financial measure is net income.

• Adjusted net income is a non-GAAP financial performance measure that the company uses for calculating adjusted earnings per share ("EPS"). Adjusted net income is defined as net income before the adjustments we apply in calculating adjusted EPS, as described below. We believe presenting adjusted net income is useful to enable investors to understand how we calculate adjusted EPS, which provides a useful view of the overall operation of the company's business. The most directly comparable GAAP financial measure is net income.

• Adjusted diluted EPS is a non-GAAP financial performance measure that the company believes offers a useful view of the overall operation of our business. The company defines adjusted EPS as EPS before tax-effected (1) restructuring costs (including accelerated depreciation), (2) asset impairment charges, (3) non-operating (gains) losses, (4) certain gains or losses on sales of properties, and (5) other items (including acquisition-related expenses, certain business transformation expenses, litigation expenses, and gains or losses on certain investments). The tax impact on these non-GAAP tax deductible adjustments is based on the estimated statutory tax rates for the United Kingdom of 19.0% and the United States of 25.5%. The most directly comparable GAAP financial measure is diluted EPS.

• Free cash flow is a non-GAAP liquidity measure that adjusts our reported GAAP results for items that we believe are critical to the ongoing success of our business. The company defines free cash flow as cash flow from operating activities as reported on the statement of cash flows less capital expenditures, which results in a figure representing free cash flow available for use in operations, additional investments, debt obligations, and returns to shareholders. The most directly comparable GAAP financial measure is net cash from operating activities.

The company uses non-GAAP financial measures for purposes of evaluating its performance and liquidity. Therefore, the company believes that each of the non-GAAP measures presented provides useful information to investors by allowing them to view our businesses through the eyes of our management and Board of Directors, facilitating comparison of results across historical periods, and providing a focus on the underlying ongoing operating performance of our business. Many of our peer group companies present similar non-GAAP measures to better facilitate industry comparisons.

(a) Includes costs incurred as a direct result of the proxy contest of $17.9 million and costs incurred related to the pending merger with New Media of $7.4 million for the nine months ended September 30, 2019.

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